No matter the age of your child (or grandchild), the staggering cost of college is very likely to be a concern. The cost of a four year education at a private college is projected to be approximately $324,000 by 2033, the year that babies born in 2015 will likely begin their college educations. This amount would discourage even the heartiest of us, and yet, there are ways to save for college that will make this goal possible. As with any kind of savings plan, slow and steady is the rule, and tax-deferred savings plans can be part of the solution.

A 529 plan is one of the most well-known college savings plans. These plans are named after the section of the IRS code that created them, and they have been in existence since 1996. There are two types of plans that are offered: college savings plans, and prepaid tuition plans. The difference between the two is that the college savings plan funds can be used at any college accredited by the U.S. Department of Education, while the prepaid tuition plan funds can generally only be used for undergraduate tuition at public colleges in your state. In Michigan, beneficiaries of the MET (prepaid tuition plan) may direct a refund amount to any out-of-state degree-granting institution. This would not be full tuition as it would be if the student were attending a Michigan school, but is a weighted average of Michigan public college tuitions.

529 plans can be a benefit to whoever funds the plan—parents, grandparents or other individuals. In Michigan, the college savings plan donor can take a tax deduction for contributions to 529 plans up to $5,000 annually for a single filer, or $10,000 for a married couple. Contributions to the MET plan are deductible in full against Michigan taxable income. The donor will need to provide the name and social security number of the beneficiary at the time of filing his tax return. Account earnings have the opportunity to grow free of Federal and Michigan tax until the funds are withdrawn. If the withdrawn funds are used for qualified education expenses (tuition, fees, textbooks, room and board), they are not taxable. Anyone can be named as a beneficiary, and under the Michigan plan, the funds in a 529 plan can be transferred to any other family member if not used by the initial beneficiary.

Coverdell Education Savings Accounts (ESA) are also available, and are similar in some respects to a 529 plan. The Coverdell ESA can be used to pay for education at any level, and can be used for school uniforms and supplies. The major difference is that only $2,000 annually per beneficiary can be added to the ESA—this is in total in all accounts in the beneficiary’s name. This contrasts with the 529 plan which has no annual limits per beneficiary. (In Michigan, the maximum amount that may be contributed per beneficiary to all 529 plans is $235,000.) The other limitation on the Coverdell ESA is that it is not available to taxpayers with modified adjusted gross income exceeding $220,000 ($110,000 for single filers.)

Savings bonds have not been popular in recent years, but they are still another tool in college savings. The money is guaranteed, unlike the 529 plan. The bonds do not have much opportunity for growth, so they would probably not be a good choice as a single vehicle for college funding.

Federal tax credits are provided for education costs not covered by one of the tax-deferred savings plans. The American Opportunity Tax Credit is worth up to $2,500 per year for the first four years of higher education. The Lifetime Learning Credit is worth up to $2,000 per year, and there is no limit to the number of years that this credit can be claimed. Only one credit may be claimed per student. Eligible education expenses that can be considered are tuition, fees, and other related expenses. Room and board and other personal expense do not qualify for these credits. Students should receive Form 1098-T by February 1, 2016. This form reports qualified expenses to the IRS and to the taxpayer. The student must be claimed as a dependent on the taxpayer’s return in order to qualify for the credit.

The American Opportunity Credit is phased out for modified adjusted gross income exceeding $180,000 on a joint return, or $90,000 on a single filer return. The Lifetime Learning Credit phase out amounts are $128,000 and $64,000. In some circumstances, it makes sense for the student to claim himself as a dependent, if eligible, so that the education credit may be used by a lower income taxpayer.

As always, please contact our office if you have questions about funding education costs and using education credits.

Updates from the State of Michigan
The MICPA has been working diligently with the State of Michigan regarding several issues. The major discussions have centered around the 2015 launch of the Michigan Treasury Online website. The State has acknowledged that the site “has not provided the service quality we expect to deliver to taxpayers.” The State has committed to improvement of the site by the end of 2015 by having all business conducted through MTO without having to enter through Michigan Business One Stop. Other improvements will be elimination of the pop-up blocker when making payments, addressing time out issues, and simplifying login requirements. The MICPA is also working with the Treasury on department communications, which is likely the largest issue between taxpayers and the State. The Treasury website will be reorganized to make information more accessible to the public, and the Treasury will work with the MICPA to ensure that notices to taxpayers contain sufficient information for a taxpayer response.